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The Securities and Exchange Commission (SEC) charged today (June 2) that Elizabeth A. Dragon, former senior vice president of research and development at biotech Sequenom, lied during at least three public presentations to analysts and investors. She claimed that Sequenom's prenatal test could predict "whether a fetus had Down syndrome with almost 100% accuracy," said the agency. But she knew that the test was "far less accurate" than that, said the SEC. When Sequenom later announced that it was no longer relying on Dragon's data, the stock plunged 76%. Without admitting or denying the charges, Dragon agreed to a consent decree that permanently enjoins her from future violations of securities laws and bars her from serving as an officer or director of a public company. A court will determine later the amount of financial penalty Dragon will have to pay.

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Comments

Don Bauder June 2, 2010 @ 4:03 p.m.

DRAGON PLEADS GUILTY TO CRIMINAL CHARGES, TOO. In addition to the SEC's filing of civil charges, the U.S. attorney's office filed a criminal charge against Elizabeth A. Dragon today (June 2). She pleaded guilty to a single count of conspiracy to commit securities fraud before U.S. Magistrate Judge Barbara L. Major. The plea is subject to final acceptance by federal court Judge William Q. Hayes. According to the U.S. attorney's office, "Dr. Dragon admitted that she and others caused Sequenom to issue press releases and various statements to investors and others falsely claiming that the Down syndrome test had been evaluated in 'blinded' studies -- that is, that the scientists conducting the tests did not know the actual outcomes. In fact, as Dr. Dragon admitted, the tests were not 'blinded' because scientists either knew the outcomes before testing the samples, or had been directed to change their initial results so that the final results matched the true outcomes...Dr. Dragon admitted that these false and misleading statements were designed to inflate and sustain the price of Sequenom's stock."

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David Dodd June 2, 2010 @ 4:14 p.m.

Bet she made enough money to more than cover the fine. They ought to toss her into the pokey.

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Don Bauder June 2, 2010 @ 5 p.m.

Response to post #2: Her sentencing is Aug. 30 before Judge Hayes. But note in the U.S. attorney's statement: "she AND OTHERS" caused Sequenom to issue false statements and press releases. So she may have the chance to get a reduced sentence by identifying those others. I hope she does, and they all go to prison. Best, Don Bauder

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Burwell June 2, 2010 @ 11:33 p.m.

According to the proxy at the SEC website, Dragon never earned more than $500,000 in any year she worked at the company. Her stock options appear to be worth at most $600,000, assuming the options are not currently under water. Her financial stake in the company was not large enough to justify the risks she took. She is ruined and will likely never find a job that pays anything.

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Don Bauder June 3, 2010 @ 6:05 a.m.

Response to post #4: The current value of the options may be $600,000, but think what they would have been worth had Sequenom really HAD a pre-natal test for Down syndrome that worked almost 100% of the time. Think of the number of pregnant women who would have taken the test. She and the other top executives -- several of whom got fired after the scandal broke -- would have been extremely rich. That stock would have gone through the roof. Now those executives' necks are in a noose -- and rightly so. Best, Don Bauder

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Visduh June 3, 2010 @ 8:57 p.m.

The next time you hear of some expert testifying to Congress or some other body, an expert carrying a Ph.D., take the testimony with a grain of salt. These over-educated "scientists" are bought and sold on a daily basis.

A real scientist would not lie about such a product. But if she has a big stake in the outcome, the temptation to lie is huge, worth millions of dollars. Scientific integrity can go out the window easily when lucre is at stake. Sad, because we can no longer rely upon scientific testimony and professionalism without second-guessing all the claims made.

She earned "only" $500K a year? That's insufficient? A few years at that level of income and she's set (or should be) for life. There's plenty of temptation there. Yeah, she should go to the slammer, but will probably escape by ratting out here co-conspirators, innocent or guilty.

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Burwell June 3, 2010 @ 10:24 p.m.

She earned "only" $500K a year? That's insufficient?

Dragon had an enormous amount of experience and commanded a salary that reflected that. I assume that she could have quit Sequenom and obtained an equivalent salary at another drug company and earned an honest living. She also could have earned equivalent stock options at another drug company without having to commit a felony. My point is that no rational person with her background and reputation would commit a felony when she could have found a new job with the same compensation and stock options. When government contractors tried to bribe Abe Lincoln during the Civil War he always forced himself to leave the room before they reached his price. Dragon sold herself for next to nothing. She should have left the room.

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David Dodd June 3, 2010 @ 10:57 p.m.

"Dragon sold herself for next to nothing. She should have left the room."

You know, I'm not so sure about her lack of funds. Most people who take big risks do so based on a bankroll. Wouldn't surprise me if she had one. The amount of the fine will likely tell us the story.

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Don Bauder June 4, 2010 @ 7:59 a.m.

Response to post #6: Dragon was not doing anything unusual, unfortunately. She just got caught. The basic fraud in businesses, particularly technologies such as biotechs and telecoms, is going public with the insiders getting stock for maybe a penny a share; making (with Wall Street's assistance) wild scientific claims; running up the stock, and then insiders jettisoning their stock as fast as the law allows. My column this week is on former San Diego plaintiff lawyer Bill Lerach. He did a good job exposing this scam. But he also hurt the entire plaintiff bar by filing shakedown suits, thus piling up working capital for his firm when the target companies settled. The laws should be changed so that those getting founders stock, such as the original top management and venture capitalists, can only sell a small percentage of their stock. If they only paid a penny a share, they can go down with the ship. There should also be more criminal penalties such as Dragon will receive. Best, Don Bauder

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Don Bauder June 4, 2010 @ 8:08 a.m.

Response to post #7: The tragic aspect of this is that she might have had a difficult time getting a job with another biotech if she had insisted on being honest. As I described in my response above, the kind of fraud she committed is, unfortunately, endemic when IPOs are hot. I have been writing about this for years. I remember writing a column spelling out the whole scam strategy in the UT. That afternoon, I was called into a star chamber with a bunch of biotech executives, along with two top executives of the UT who were, unfortunately, too dense to understand what I was saying. It was a great session, I thought. The biotech executives, who had all raked in money in IPOs, knew I was right but screamed that I was wrong. The UT executives never understood what was going on. Best, Don Bauder

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Don Bauder June 4, 2010 @ 8:12 a.m.

Response to post #8: Don't look at the salary. Look at the stock options. Those data are available. Past 10Ks, 10Qs, and proxies (particularly proxies in this case) are still online through the SEC's Edgar or other sources. (I use 10K Wizard, which I have to pay for.) Best, Don Bauder

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nan shartel June 4, 2010 @ 9:56 a.m.

Don...may i asked if mothers had abortions after taking the test???

an even graver injustice in my books if the fetuses weren't Downs Syndrome

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Don Bauder June 4, 2010 @ 12:24 p.m.

Response to post #12: I don't believe the drug ever got FDA permission to be marketed, so the answer would be no. Best, Don Bauder

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paul June 4, 2010 @ 1:27 p.m.

Nan,

An actual test like this (that worked) would be a very good thing, since it would replace the amniocentesis test. Whoever develops a non-invasive alternative to amnio will become filthy rich, which I'm sure caused a lot of pressure to be put on this woman.

The current stated odds of a miscarriage due directly to the amnio test itself is 1 in 200. The test gives no information that can help the baby or the mother, it is strictly informational to give the option to abort. That is 1 in 200 mostly healthy kids lost just to gather some information.

With twins the odds are even worse, and if a mother decided to selectively abort 1 of 2 fetuses due to a positive test, the risks to the remaining fetus is also high, making the risk of the test in twins unethical in my opinion, yet it is routinely scheduled.

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Don Bauder June 4, 2010 @ 8:38 p.m.

Response to post #14: I think everybody agrees that a 100% accurate test (or close to 100%) for Down syndrome would be a big seller. Hence, the pressure to fake results. Remember, test results could have been altered. Best, Don Bauder

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